1995-024-Making Findings Regarding The Rate Base For Green Valley Disposal Company For 1994-1996 And Establishing Base Rates For Refuse Collection In The Town Of Los GatosRESOLUTION 1995 -24
RESOLUTION OF THE TOWN COUNCIL OF THE TOWN OF LOS GATOS
MAKING FINDINGS REGARDING THE RATE BASE FOR GREEN VALLEY
DISPOSAL COMPANY FOR 1994 -1996 AND ESTABLISHING BASE RATES FOR
REFUSE COLLECTION IN THE TOWN OF LOS GATOS
WHEREAS, the Town has conducted an extensive and thorough performance audit
and rate adjustment proceeding regarding Green Valley Disposal Company, Inc.'s refuse,
recycling, and yard waste collection services under its agreements with the Town; and
WHEREAS, the attached findings and decision reflect the analysis and conclusions
of the Town Council and are consistent with Resolution 1995 -19 adopted by the Council on
January 17, 1995,
NOW, THEREFORE, THE TOWN COUNCIL OF THE TOWN OF LOS GATOS
DOES HEREBY RESOLVE AS FOLLOWS:
1. The Findings and Decisions attached hereto as Exhibit A are approved and
adopted.
This decision constitutes a final administrative decision pursuant to Code of Civil
Procedure section 1094.6 as adopted by section 1.10.085 of the Town Code of the Town of
Los Gatos. Any application for judicial relief from this decision must be sought within the
time limits and pursuant to the procedures established by Code of Civil Procedure section
1094.6, or such shorter time as required by state or federal law.
PASSED AND ADOPTED at a regular meeting of the Town Council of the Town of
Los Gatos, California, held on the 6th day of February, 1995 by the following vote.
COUNCIL MEMBERS:
AYES: Randy Attaway, Joanne Benjamin, Linda Lubeck,
Mayor Patrick O'Laughlin
NAYS: Steven Blanton
ABSENT: None
ABSTAIN: None k4L
�
SIGNED:
MAYOR OF THE TOW OF LOS GATOS
LOS GATOS, CALIFORNIA
ATTEST:
fI
CLERK OF THE TOWN- LOS GATOS
LOS GATOS, CALIFORNIA
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FINDINGS AND DECISION IN
1994 -1995 RATE PROCEEDING REGARDING
A RATE ADJUSTMENT AND ESTABLISHMENT OF A REVISED
RATE SCHEDULE FOR REFUSE, RECYCLING, AND YARD WASTE COLLECTION
SERVICES OF GREEN VALLEY DISPOSAL COMPANY, INC.
IN THE TOWN OF LOS GATOS
1 I. RATE- SETTING PROCESS.
A. This rate - setting proceeding is conducted pursuant to the authority of the
under State law, Town Code § 11.10.030, and its franchise agreement with Green Valley
Disposal Company, Inc. Pursuant to public utility law and the Franchise Agreement, Green
Valley Disposal Company [Green Valley] bears the burden of proof in demonstrating the need
and extent of any rate adjustment.
B. The Town conducted a public forum regarding the expansion of the
recycling program, the initiation of a yard waste collection program, and the rate structures
might be required to support those services. Public notice was provided to each Green
subscriber by the Town of those forums by mail and newspaper publication.
C. The Town Council began its hearings on the recycling, yard waste, and
structure systems in November, 1994, and has held 3 public hearings on the matter. Notice
these hearings was given by mail to approximately 500 people as well as newspaper publication,
and information from Town staff was widely disseminated by the Town.
D. The Town received extensive public comments, both oral and written, during
public forum and public hearings, and the Council has considered all of those comments and
concerns. The Town has also provided Green Valley with approximately 12 months to respond
to the concerns expressed by the performance audit performed in conjunction with this rate -
setting, 5 years to respond to concerns about soaring disposal surcharges, and almost 12 months
to respond to concerns expressed by the Rate Review Committee concerning financial
information and rate schedules.
E. During the current rate - making proceeding, Green Valley has not presented
Town or the Council with a rate adjustment application or an adequate Schedule of
Instead, the Town in cooperation with the other 3 West Valley jurisdictions has spent
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of hours of staff and consultant time attempting to determine what rates should be
for the provision of refuse collection services.
F. The Rate Review Committee, Town staff, and the Town Council disagree
Green Valley over whether the information provided by Green Valley has been complete or
adequate to resolve the significant issues presented, received only after repeated requests by
staff, and given the ratepayers an appropriate opportunity to comment or examine the
performance of Green Valley or its assertions of profit entitlement.
G. Green Valley's audited financial statements as of June 1994 were not
available to the Town until December 1994, and then only when the Town requested
directly from the Company's offices.
H. Green Valley did not provide information to the general public regarding
proposed rates. The Town bore the costs of mailing rate information, fielding phone and
written inquiries, and conducting the community forum and hearings regarding the rates.
I. During the course of this rate proceeding, Green Valley filed suit against the City
of Monte Sereno over its 1994 rate decisions. Even before the Town's and Saratoga's n
proceedings concluded, Green Valley filed a claim against both the Town and the City
Saratoga alleging that the municipalities' respective contracts had been breached. T
approach to rate proceedings by Green Valley has not been helpful.
II. FRANCHISE HISTORY.
A. In 1983, the Town of Los Gatos entered into a Franchise Agreement for a 20 -year
period that granted Green Valley the exclusive right to provide refuse collection services in the
Town in exchange for the right of the Council to set rates and generally regulate service and
for payment of a 10% franchise fee on Green Valley's gross revenues resulting from its refuse
collection services in the Town as defined in the Franchise Agreement. At the same time that
the Franchise Agreement was approved, the Town approved refuse collection rates for Green
Valley's services.
B. At the same time that the Franchise Agreement was approved, the
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I approved an agreement with Guadalupe Rubbish Disposal Company, which was and is wholly
2 and privately owned by the same 4 shareholders who wholly and privately own Green Valley.
3 C. The Franchise Agreement provides that Green Valley's rate adjustment
4 applications during the term of the franchise are to consist of certain designated items and be
5 subjected to review and comment by a Rate Review Committee consisting of a member from
6 each of 4 West Santa Clara Valley jurisdictions (Town of Los Gatos and the Cities of Campbell,
7 Monte Sereno, and Saratoga) that share related refuse collection situations.
8 D. The Rate Review Committee is to consider the following in reviewing the
9 proposed schedule of rates:
10 i. The acceptability of expenditures, performance incentives and sanctions,
11 rate comparability, and other information as the Committee determines to be
12 appropriate.
13 ii. When determining the profit level, use the operating ratio method with a
14 five (5) percent after -tax return (excluding tax credits and operating losses) as a
15 guideline.
16 iii. When calculating the revenue side of the operating ratio, exclude:
17 (a) Prior years' earnings from short -term investments generated from
18 prior profits or retained earnings in each fiscal year;
19 (b) Tax credits; and
20 (c) Prior year net operating losses.
21 E. The Committee's recommendation is then to be forwarded to the Town Council
22 for consideration and determination of what are the proper expenses to be used in the
23 calculation of a rate base after Green Valley has been given a chance to provide documentation
24 to the Town, and for a determination of what rate adjustment if any is to be made.
25 F. The 1983 rate - setting resulted in a small profit in 1983 -1984 to Green Valley,
26 which it reported at .7% for the 4 or 5 jurisdictions as a whole.
27 G. Green Valley then sought a rate adjustment in 1984, which resulted in an after -tax
28 1 profit from the five affected jurisdictions of some 11.3% in 1984 -1985 and 2.5% in 1985 -1986.
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H. Green Valley was granted a rate increase in 1986, which resulted in
profit of 11.6% in 1986 -1987, 12.8% in 1987 -1988, and 4.7% in 1988 -1989 from service in the
Town of Los Gatos, according to Green Valley's own reports.
I. Green Valley's operations were subjected to a performance audit in 1988 by
Arthur Anderson as provided in the Franchise Agreement. The audit concluded that
profits that Green Valley was making usually exceeded the 5% guideline and that revenue
expenditure projection information supplied by Green Valley was inadequate to implement
franchise language. In addition, Arthur Anderson was unable to determine from Green Val]
financial statements how much profit was attributable to each of the 4 Green Valley franch
or to non - franchise activity.
J. In 1989 and 1990, a new rate - making approach was developed to dampen the
effect that soaring disposal surcharges caused. A stand -alone approach to rates was adopted
in 1990 and reapplied in the 1992 rate - making. During these years, Green Valley reported the
following after -tax profits from its Los Gatos operations: 1989 -1990, a loss of 2.7 %; 1990 -1991,
unreported; 1991 -1992, 2.2 %; 1992 -1993, 4.0 %.
K. Over the franchise period in which Green Valley is able to provide
information that estimates the expenses and revenues attributed to Los Gatos service,
Valley has been able to average a 5.5% after -tax, net profit per year according to its
calculations.
L. In 1994, the Council sought public bids for a contractor to provide
services of a wide variety of recyclable materials and yard waste, and after considering the bids
received, the Town awarded a contract for recycling collection and a contract for yard waste
collection to Green Valley. Those contracts are separate from the Franchise Agreement, but
the rates to support those services are established through the Franchise Agreement rate
proceeding.
M. The current rate - setting proceeding was made a part of the routine
performance audit under the Franchise Agreement. The performance audit was paid for by
ratepayers from the 4 West Valley jurisdictions and a portion of the County of Santa Clara,
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was conducted by Hilton Farnkopf & Hobson. The performance audit was approved by the
Council on December 5, 1994, while reserving consideration of the operating ratio issues
Green Valley disputed a number of recommendations contained in the performance audit w
discussed below.
N. The Rate Review Committee then developed a rate base analysis for each
jurisdiction and recommended rates for each jurisdiction. The report of the Rate Review
Committee was accepted by the Council on January 3, 1995. The Committee Report contained
a number of rate base alternatives, and this decision determines which alternatives are to be
applied in the Town.
1 III. ALLOWED EXPENSES.
A. The Council confirms the normal operating expenses involved in service by
Valley in the Town with the following disallowances:
$20,584 of administrative expenses allocable to services performed by the Green
Team, which does not serve the Town;
$3,067 in employee costs also allocable to the Green Team;
Approximately $6,974 in advertising and promotional expense that is unnecessary
due to the exclusive nature of Green Valley's franchise;
Consultant fees as described in Section (V) below;
An $80,000 increase in salaries not proposed until the end of the rate proceedings
in December 1994 by Green Valley, which was not documented or justified, and
which would go to shareholders.
B. The rate base approved for 1993 -1994 and 1994 -1995 consists of labor, operating
costs, depreciation and interest, administrative costs, disposal fees, and franchise fees as
presented in the performance audit and as may be more fully described in these findings.
C. Disposal fees plus surcharges for 1993 -1994 were as follows: $43.55 per ton
effective July 1, 1993; $42.36 per ton effective October 1, 1993; and $42.95 per ton effective
January 1, 1994. Disposal base rates for 1994 -1995 are set at $26.60 per ton and disposal
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surcharges are set at $16.36 per ton. Projected tonnage for the Town of Los Gatos for 1994-
1995 is 31,849 tons.
D. The total approved budgets for 1993 -1994 and 1994 -1995 for the 4 West Valley
municipalities are set forth in Attachment 1 to these findings. These budgets are approved for
illustrative purposes only, because each of the other jurisdictions holds separate franchises and
authority to regulate Green Valley. The approved budgets for 1993 -1994 and 1994 -1995 for
services in the Town of Los Gatos are set forth in Attachment 2 to these findings. The
approved budgets for 1994 -1995 were developed by applying the annual escalation factors as
listed in the performance audit to the costs in each category and consistent with the ongoing
requests of Green Valley for use of these types of factors.
IV. FRANCHISE FEES.
A. Over the life of this franchise, the Town has calculated its franchise fees on all
revenues of Green Valley, including the franchise fees themselves. This appears to doubly fee
Green Valley and the ratepayers, and therefore, this rate setting ends that practice. Franchise
fees for the Town will be calculated solely on gross revenues without double- counting the
franchise fee itself. This will result in a reduction in revenue to the General Fund of the Town
of some $38,400 in 1993 -1994 and $37,100 in 1994 -1995, or roughly $37,000 thereafter, which
will be direct savings to the ratepayers.
V. CONSULTANT FEES.
A. Green Valley paid Barakat & Chamberlin, Inc. [BCI] approximately $141,000 to
assist it in responding to the performance audit and the current rate - setting process. In
justifying its payments to BCI, Green Valley conceded that it does not have the in -house
expertise to adequately participate in a rate adjustment proceeding without consultants. Green
Valley has the obligation under Section 5(D) of the Franchise Agreement to prepare its rate
applications and rate proceedings at its own cost. However, Green Valley has not presented
any budget for the future retention of such expertise, whether in -house or by contract. In
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addition, there is no apparent reason that better organization and training within Green
I would not obviate the need for such consultant assistance.
B. BCI made one presentation to the Town Council on November 21, 1994.
testimony focused on the profit entitlement of Green Valley and payment of its own fees as an
operating expense, and none of BCI's work appears to have addressed any issues of efficiency,
restructuring of accounting or customer service practices, ratepayer needs or desires, improved
container services, ratemaking alternatives, or other central issues in this ratemaking
proceeding. BCI conducted no community outreach efforts and did not participate in any
community forums on refuse collection or recycling. BCI did no analysis of the benefits of
various profit -basis alternatives or projections of the effect of reductions in the numbers of cans
picked -up. Following the November 21 meeting, BCI did not make any presentation to the
Council or the public. It is therefore inappropriate for the ratepayers to bear the costs of this
consultant work.
C. In addition, the one -time waiver in this rate - making proceeding of
requirement that Green Valley complete and file a comprehensive application for a
adjustment means that Green Valley has avoided the non - recoverable expense of preparing
processing such an application. Instead, the ratepayers and the general funds of the
Valley jurisdictions, and of the Town in particular, have had to bear the brunt of
proceeding.
VI. LEVEL OF PROFIT.
A. Green Valley contends that it is entitled to a 5 % after -tax profit each and
year of the franchise. Such an interpretation is inconsistent with the terms of the
Agreement, the best interests of the ratepayers, and the history of the franchise since 1983.
B. Green Valley made such large surplus profits in the mid- 1980's from its
in the Town of Los Gatos that it voluntarily allowed some of those surplus profits to be
to holding the rates of service down for a short period of time. However, none of that
profit was assigned investment return and the excess profits in 1984 were never credited
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I ratepayers. In addition, it appears that Green Valley has averaged approximately 5% after -tax
2 profit over the entire term of the franchise. Given the fact that Green Valley has suffered
3 some shortfalls in profit during 1992 -1993, it is fair that Green Valley be granted some
4 additional rate relief to pay for this estimated shortfall in past profit, and Green Valley sought
5 an interim rate increase in 1993 for the 1993 -1994 year, which was delayed in order to complete
6 an adequate audit of the service. On the other hand, Green Valley has not provided the Town
7 with any evidence that these shortfalls were necessarily incurred or that Green Valley made any
8 efforts to reduce the alleged shortfalls. Given this situation, the Town finds that the estimated
9 shortfall in profit from service in Los Gatos is $155,105 for 1992 -1993, $239,765 for 1993 -1994,
10 for a total figure of $394,870.
11 C. The 5% after -tax profit guideline is not contained in the Franchise Agreement
12 language outlining the Council's review of the rate adjustment application. However, the
13 Council believes that 5% is a useful guideline in evaluating the estimated profits that Green
14 Valley should be allowed to take out of the Los Gatos service.
15 D. Green Valley's refuse collection service in Los Gatos continues to involve almost',
16 no risk and almost no capital investment. There is no indication that any risk has increased
17 since 1983, and in fact, the risk may actually have been significantly reduced as the community
18 has proven to be built -out and stable. There is no indication of any billing or collection
19 problems and no exposure of employees to any particular risks in making collections.
20 E. The Council finds that 5010 is a guideline as explicitly stated in the Franchise
21 Agreement and not an entitlement or guarantee. The Council believes that the 5% after -tax
22 profit can and should be varied to apply sanctions for poor or inadequate performance or
23 service or reward for exceptional service or risk. While the on- street performance of Green
24 Valley has been determined by the auditor to be acceptable, the provision of financial
25 information, rate justification, and public information on proposed rates has fallen short of a
26 reasonable standard. Therefore, it would be appropriate under the franchise for the Town to
27 apply a less - than -5% profit for the coming rate cycle. However, because of the volatility and
28 uncertainty of refuse collection during the coming 12 to 36 months as recycling and yard waste
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collection develop in the Town, the Council is willing to allow the 5% after -tax profit on
designated expenses.
F. In resolving the issue of a shortfall in Green Valley's profits during 1985
present, Green Valley shall not be allowed an after -tax profit in excess of 5% until at least such
time as the next rate adjustment occurs. Any profits earned in excess of the 5% until the next
rate adjustment shall go to fund the balancing account established in Section VIII of this rate -
making. Should that balancing account deficit be paid off before the next rate adjustment, any
profits above the 5% profit allowance shall be deposited in an investment quality account for
the purpose of reducing the rate adjustment required by Green Valley during the next rate
adjustment. Principal and interest derived from that account shall be used to benefit the
ratepayers. The status of the Town of Los Gatos balancing account shall be separately
calculated, in accordance with the agreed -upon procedures agreed to by both parties. Such
calculation shall be audited by the auditors for Green Valley on an annual basis. The auditors
for Green Valley shall report their findings on the calculation in a separate report using the
previously agreed upon procedures and issue their report thereon. This report must include a
reconciliation of the calculation to the audited financial statements of the Company
VII. EXPENSES ON WHICH PROFIT IS TO BE BASED.
A. FRANCHISE FEES. Green Valley has requested the Town to continue to
authorize Green Valley to take a profit on the franchise fees imposed by the Town under the
Franchise Agreement. Such a profit calculation does not seem to make sense, because the
Franchise Agreement calls for the franchise fees to be charged on gross revenues, apparently
including Green Valley profit. However, profit has been allowed on franchise fees since 1983,
and there is no evidence that any aspect of the franchise fee or its basis has significantly
changed since 1983. Therefore, the Town will continue to allow the Town franchise fees to be
included in the calculation of the operating ratio and allowable profit for Green Valley.
B. DISPOSAL BASE RATES. Green Valley has requested the Town to continue
to authorize Green Valley to take a profit on the disposal base rates charged to Green Valley.
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Refuse is usually disposed at the Guadalupe Landfill, which is wholly owned and operated by
the Guadalupe Rubbish Disposal Company. The allowance of profit on these base rates is a
difficult question. Green Valley bears little risk with regard to these base rates, because the
Town has separately contracted with Guadalupe to allow Green Valley to dispose of as much
refuse and trash as Green Valley delivers from the Town. Green Valley expressly disclaims any
contractual relationship with or ability to influence any operation or charge of Guadalupe. In
addition, Green Valley has no incentive to seek alternative disposal sites because of the Town
contract with Guadalupe and actually earns windfall profit when Guadalupe increases its
charges. However, the Franchise Agreement requires Green Valley to dispose of rubbish and
trash whether or not the Town has designated a disposal site. As with franchise fees, the Town
has allowed profit on disposal base rates since the inception of the franchise in 1983, and
disposal base rates have not increased dramatically since that time. Therefore, the Town will
continue to allow the disposal base rates to be included in the calculation of the operating ratio
and allowable profit for Green Valley.
It is noted that Green Valley was unable to satisfy the Council's and public's
about the handling of yard wastes and assessment of costs by Guadalupe Rubbish Dis
Company. Green Valley asserts that it has no contractual relationship and no influence
the Landfill Company. Instead, Green Valley asserts that the Town alone bears responsi
for disposal through its contractual arrangements, and Green Valley is merely a delivery se
subject to Town direction in landfill matters.
C. DISPOSAL SURCHARGES. Green Valley has requested the Town to resume
authorization of Green Valley taking a profit on the disposal surcharges passed through
Valley.
At the time that the Franchise Agreement was signed, there were no surcharges
disposal base rates. The first surcharge on solid waste disposal was imposed in 1987 -1988, and
the total of all such surcharges remained de minimis at less than $1 per ton until 1990 -1991.
The surcharges on the disposal of refuse then soared dramatically beginning at $5.08 per
ton, to $15.99 per ton in 1992 -1993, and reached $16.36 per ton in 1994 -1995. The principal
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contributor to that increase has been the imposition of a disposal tax by the City of San Jose.
Any profit on these surcharges has not been earned in any way by Green Valley, poses no risk
of any kind to Green Valley operations, and would be a fortuitous windfall. Disposal
surcharges, like disposal base rates, are charged to the Town by Guadalupe as part of the 1983
agreement to which Green Valley was not a party. Guadalupe Rubbish Disposal Company
voluntarily incurred these fees and surcharges by initiating annexation to the City of San Jose.
Neither that annexation nor the surcharges benefit the customers of Green Valley in the Town
of Los Gatos.
In addition, the Town along with a number of other municipalities have filed suit in
California Superior Court seeking to overturn the City of San Jose surcharges, and the T
has incurred significant legal expense in that proceeding. Green Valley has neither joined
supported that litigation in any way.
Beginning in 1990, the West Valley jurisdictions began disallowance of profit on
surcharges. Green Valley has not provided any persuasive argument or reason why
disallowance should not continue. Therefore, no profit on disposal surcharges will be all(
to Green Valley, but Green Valley will be allowed to recover its actual expenses for
surcharges.
VIII. BALANCING ACCOUNT.
A. According to Green Valley's testimony, the theory that there may be a
account deficit evolved from the rate - making in 1992, in which a standalone year was used to
set rates. Green Valley asserts that its profits fell short of the 5% mark during the years 1992-
1993 and 1993 -1994. Green Valley's representative, Gerard Wen, testified that following the
conclusion of that rate - making, Green Valley spoke to one or another unidentified city manager
who apparently assured Green Valley that the next rate - making would make up a profit
shortfall. The Town Council neither received any notice of such a side agreement nor agreed
to such a rate system.
B. A balancing account system is inconsistent with the terms of the Franchise
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Agreement, which requires Green Valley to provide a 3 -year budget as part of any rate
adjustment application. Green Valley has not been able to provide such a 3 -year budget during
this proceeding. Town staff hypothesized that the reason for this was that the recycling and
yard, waste programs leave a large number of variables in any such budget, so that it is very
difficult to predict the revenues and revenue sources; however, neither Green Valley nor its
consultants, BCI, have provided the Council with a 3 -year projection.
C. Green Valley demanded that the ratepayers of the Town pay off the
account" deficit in a single calendar year. Green Valley estimated that this would require an
additional 100% increase in refuse collection rates above the staff recommendation, from $6.65
per can now to $21.50 per can under Green Valley's proposal. Without any financial analysis,
Green Valley argued that if the Town failed to grant this immense increase, Green Valley
would be unable to obtain credit lines from banks and might operate at a loss. The audited
financial statements of Green Valley prepared by Hood & Strong, Green Valley's own audit
firm, show that Green Valley has made a significant profit in both 1993 and 1994, and that
Green Valley holds a largely unused line of credit of approximately $500,000. Green Valley,
has not provided any cash flow analysis that indicates that Green Valley has any foreseeable
expenses that would jeopardize its financial position should any such "deficit" be paid off by the
ratepayers in a measured time period of 41 months, consistent with the 3 -year budgeting set
forth in the Franchise Agreement. Should Green Valley actually suffer financial jeopardy,
Green Valley is free to apply for rate relief at any time.
D. Green Valley also demanded a higher calculation of a "deficit" than the
is willing to award. Green Valley has averaged a 5% annual, after -tax profit over the life of
the franchise. Green Val_ey's calculations discount its excess profits in the 1980's and its usage
of excess revenues from Los Gatos service to reduce rates in Saratoga. The ratepayers of the
Town of Los Gatos owe no more than an average 5% profit and the reasonable "deficit"
amount determined in this Decision by the Council will bring Green Valley up to or above an
average 5% profit for the franchise to date.
E. Green Valley also demanded that the ratepayers pay interest on the
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I "balance" in the deficit of the balancing account. Green Valley conceded that it had no
2 attributed any interest to the excess revenues it had received in the 1980's from Los Gato!
3 ratepayers but the loose oversight in effect at that time allowed those excess revenues to be
4 diverted in part to support lower rates in Saratoga. Therefore, there is no quid pro quo to be
5 served by awarding interest to Green Valley on this supposed deficit, and no interest will be
6 awarded.
7 F. Green Valley's audited financial statements prepared by Hood & Strong, Green
8 Valley's auditors, do not disclose or note any balancing account, account receivable analogous
9 to a balancing account, or any debit or credit related to any such balancing account.
10 G. It is the intention of the Council to eliminate the use of a balancing account and
11 fully return the franchise to the original requirements for a 3 -year rate - setting in which Green
12 Valley bears risk and is rewarded for efficient performance, and the Council hereby revokes any
13 waiver that may have occurred with regard to the requirement of a 3 -year budget submittal by
14 Green Valley as the basis for rate adjustments. Therefore, the current rate - setting adopts the
15 balancing account system set forth in Attachment 3 only until such time as the compromised
16 amount is paid as shown in the Exhibit.
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18 IX. TAX RATE FOR CALCULATION OF AFTER -TAX PROFIT.
19 A. Green Valley has an obligation to the ratepayers to seek and use the most cost
20 effective tax basis available. The Town has neither dictated nor approved any particular tax
21 status during the franchise history.
22 B. Green Valley is unable to divulge what its actual income tax rates or payments
23 have been or are estimated to be. Instead, it has urged usage of a top bracket rate of between
24 45 and 49 percent. This is based on Green Valley's current status as an S -Corp, which means
25 that the 4 individual shareholders are taxed, rather than the corporation. Green Valley is not
26 entitled to attribute more than its actual tax expense in calculating an estimated after -tax profit.
27 The Consultant who performed the performance audit recommended that a tax rate of 35% be
28 used.
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I C. The Town contacted the California Public Utilities Commission to determine wha
2 the normal practice was with regard to privately held corporations, and the PUC applies :
3 standard C -Corp so that issues of highly individualized income tax brackets, affluence, poor tw
4 planning, and so forth do not control the rates charged and penalize the ratepayers.
5 D. The Town presented Green Valley with a 40.138% tax estimate which wouh
6 account for a standard Federal and State C -Corp income tax bracket. Green Valley had n<
7 opposition or evidence to offer in opposition to that estimate. Therefore, the tax estimate foi
8 this rate setting to be used in calculating the after -tax profit shall be 40.138 %.
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10 X. DIFFERENTIAL RATES.
11 A. Many members of the public requested that Green Valley provide rates that
12 would differentiate on the basis of amounts or types of refuse as well as types of residential
13 structures. Green Valley reported that its accounting systems required manual input and did
14 not have the necessary flexibility to make these alternatives cost effective. In addition, Green
15 Valley reported that use of a mini -can rate would not create meaningful savings, and other
16 ratepayers would bear the costs of providing that service. Green Valley did not have a cost
17 effective means of supervising composting customers, and once again the other ratepayers would
18 bear a heavy burden for providing such an exemption. Green Valley further reported that
19 technology might lead to the use of a system that would weigh individual garbage upon pick -up
20 and provide a billing system that would charge by weight, which is the ultimate goal imposed
21 by the State Legislature for solid waste reduction; however, such a system is in the distant
22 future.
23 B. Therefore, the Council finds that a senior citizen /disability rate available only to
24 those receiving Supplemental Security Income from the Social Security Administration is
25 approved as shown on Attachment 4, so that this rate adjustment will not have too severe an
26 impact on those least able to pay.
27 C. However, the need for recycling, yard waste disposal, and reduction in the solid
28 waste stream is community -wide, which everyone must share. The proposed rates and the wide
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array of services that will follow make the rate structure among the very lowest in the San
Francisco Bay Area. A share of the residential cost is already being borne by the commercial
sector. It would not be fair to families and large households to unduly penalize them and to
increase rubbish collection rates by another 100% to provide a small benefit to those who
reduce their trash flow. Because the Town does not require trash collection subscription, there
are a wide variety of private efforts and arrangements that can be made that would not unduly
penalize the majority of ratepayers.
D. Therefore, for the current rate - making the rate schedule attached hereto
Attachment 4 is adopted. However, the Council will welcome any future proposals that
reward persons who reduce their solid waste stream so long as they do not unduly penalize
normal users who have little or no choice in reduction. The Council expects that Green Valley
will take the lead in seeking such solutions. In addition, it is hoped that the recycled yard waste
will be returned to residents as compost.
XI. CONDOMINIUM /TOWNHOME COMPLEXES.
A. The Council received a great deal of public comment regarding recycling and yard
waste collection in the condominium and townhome complexes. Green Valley assured
Council that it has a program in place to address these concerns and will pursue outre
programs to address these concerns and not double charge for such service. Green Valley is
unable to obtain the cooperation of Guadalupe Rubbish Disposal Company in creating a viable
yard waste acceptance program at the Landfill. It is also noteworthy that other service
providers can establish yard waste receiving facilities in Town without interfering with Green
Valley's collection contract with the Town.
B. Green Valley has assured the Council that the public's concern on these
will be resolved.
XII. OPERATING RATIO.
A. The ultimate result of the decisions made in this rate - setting is that an operating ratio
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of approximately 93.310 on all expenses will be established for 1993 -1994 and 1994 -1995.
B. These operating ratios are consistent with the operating ratios throughout the Bay
Area, and Green Valley has not demonstrated any demand from investors, banks, or
purchasers for any different operating ratio.
C. These operating ratios will provide Green Valley with a fair and reasonable
on expenses.
I XIII. RATES ARE JUST AND REASONABLE TO THE RATEPAYERS.
A. The rates established in Attachment 4 are just and reasonable to the
in the Town of Los Gatos.
XIV. MISCELLANEOUS.
A. Nothing contained in this decision shall be construed in any way as binding
applying to any rate - making decision or interpretation by the Cities of Saratoga, Monte
or Campbell, and this rate - making decision is made in the best interests of the refuse, recycling,
and yard waste collection services for the citizens of the Town of Los Gatos alone.
B. Green Valley has elected to place similar issues of profits on franchise fees and
disposal costs, and other related issues before the U.S. District Court for the Northern Dis
of California in a lawsuit against the City of Monte Sereno. The Town has acted fairly in 1
of Green Valley's assertions and representations; should the Federal or State Courts in
Monte Sereno litigation determine that the allegations of Green Valley regarding entitlen
to profits and balance accounts are incorrect or untrue, the Town reserves the right to reN
those allowances as excess and unearned revenue for purposes of future rate - making.
C. Green Valley has asserted that prior rate decisions, statements by Rate
Committeemembers, or other occurrences have created ambiguities in the Franchise Agreement
that have devalued the Council's authority to set rates and the ratepayers' right to a just and
reasonable system. The Council does not agree with Green Valley's position, and one of the
purposes of this written decision is to minimize Green Valley's opportunity to hypothecate
16
I ambiguities in the future.
2 D. Under the State Government Code and the Town of Los Gatos Town Code, any
3 amendment to the Franchise Agreement or any agreement between the Town and Green Valley
4 requires the authorization of the Council.
5 E. The rates established by the Town and the approved budgets for Green Valley
6 in this rate - making process are integrated decisions, and should any part of this rate- making be
7 determined to be invalid or illegal, the entire decision must be reconsidered and the rates and
8 budget reevaluated in light of the invalidity or illegality, and no part of this rate - making process
9 or budget shall be severable.
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11 17
ATTACHMENT 1
TOTAL APPROVED BUDGET FOR GREEN VALLEY
FOR FISCAL YEAR 1993 -1994
(FOR ILLUSTRATION PURPOSES AS THE OTHER 3 WEST VALLEY
JURISDICTIONS SEPARATELY CONTROL THEIR BUDGETS AND RATES)
LABOR $ 3,960,451
OPERATING COSTS 1,642,745
DEPRECIATION 655,024
AND INTEREST
ADMINISTRATIVE 437.396
COSTS
SUBTOTAL $ 6,695,616
DISPOSAL COSTS $ 4,427,815
FRANCHISE FEES 1,291.O07
TOTAL OPERATING $12,414,438
EXPENSES
PRE -TAX PROFIT $885,743
INCOME TAXES **(355,520)
AFTER -TAX 530,223
PROFIT
+- * Green Valley underestimated fees in its proposed budget by $36,336
** Assumes that the other 3 jurisdictions adopt a 40.138% tax rate, over which the
Town has no control
18
TOTAL APPROVED BUDGET FOR GREEN VALLEY
FOR FISCAL YEAR 1994 -1995
(FOR ILLUSTRATION PURPOSES AS THE OTHER 3 WEST VALLEY
JURISDICTIONS SEPARATELY CONTROL THEIR BUDGETS AND RATES)
LABOR
$ 4,038,425
OPERATING COSTS
1,700,241
DEPRECIATION
655,024
AND INTEREST
ADMINISTRATIVE
455.564
COSTS
SUBTOTAL $ 6,849,254
DISPOSAL COSTS $ 4,664,081
FRANCHISE FEES 1.242.763
TOTAL OPERATING $12,756,098
EXPENSES
PRE -TAX PROFIT $914,290
INCOME TAXES * *(366.978)
AFTER -TAX $547,312
PROFIT
** Assumes that the other 3 jurisdictions adopt a 40.138% tax rate, over which the
Town has no control
19
ATTACHMENT 2
TOTAL APPROVED BUDGET FOR GREEN VALLEY
FOR FISCAL YEAR 1993 -1994 FOR SERVICE IN THE TOWN OF LOS GATOS
LABOR $ 1,250,534
OPERATING COSTS 531,739
DEPRECIATION 202,566
AND INTEREST
ADMINISTRATIVE 125,778
COSTS
SUBTOTAL $ 2,110,617
DISPOSAL COSTS $ 1,321,721
FRANCHISE FEES 370,707
TOTAL OPERATING $ 3,803,046
EXPENSES
PRE -TAX PROFIT $274,732
INCOME TAXES (110,272)
AFTER -TAX $164,461
PROFIT
20
A A
TOTAL APPROVED BUDGET FOR GREEN VALLEY
FOR FISCAL YEAR 1994 -1995 FOR SERVICE IN THE TOWN OF LOS GATOS
LABOR $ 1,294,549
OPERATING COSTS 550,454
DEPRECIATION 209,696
AND INTEREST
ADMINISTRATIVE 130,205
COSTS
SUBTOTAL $ 2,184,904
DISPOSAL COSTS $ 1,368,242
FRANCHISE FEES 383,755
TOTAL OPERATING $ 3,936,901
EXPENSES
PRE -TAX PROFIT $284,402
INCOME TAXES (114,153)
AFTER -TAX $170,249
PROFIT
21
Town of Los Gatos
Balancing Account 3 -Year Amortization Schedule
1994 -95 1995 -96 1996 -97 1997 -98
Revenue from
Current Rates (b)
Revenue
Requirement
4,176,365 5,622,069 5,622,069 6,122,433
4,979,552 5558,262 5,752,801 5,954,149
Current
(803,187)
63,807
(130,732)
168,284
Surplus/ (Deficit)
Beginning
(394,870)
(595,680)
(531,873)
(162,242)
Surplus/ (Deficit)
Interest on BA
Ending Surplus/
(1,198,057)
(531,873)
(662,606)
6,042
(Deficit) before rate adj.
Amortized Portion (a)
602,377
0
500,364
0
Ending Surplus/
(595,680)
(531,873)
(162,242)
6,042
(Deficit)
Required Rate
24.10 %
0.00%
8.90 %
0.00%
Adjustment
Assumptions:
Operating Ratio 5.00% after -tax profit on op. exp. excl. disposal surcharges
Inflation Rate 3.50%
Interest Rate 8.75%
1994 -95 rate adjustment effective 2/1/95
No rate adjustment on 7/1/95
1996 -97 rate adjustment effective 7/1/96
1994 -95 revenue requirement includes 5 months of g/w and recycling
1995 -96 revenue requirement and beyond includes 12 months of g/w and recycling
(a) 1994 -95 amortization includes an additional $183,000 generated from residential rates
(b) 1995 -96 revenues and beyond include an additional $439,200 from residential revenues
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Page 2
DOB rates reflect a policy of having the DOB customers pay for the weight of debris. Accordingly,
customers will be charged $52.00 per ton for the weight over the allowed limit. Since disposal fees
are based on weight, this system provides equity.
CUBIC YARDS PRICE ALLOWED WEIGHTS
18 $362 1.5 tons
30 $510 4.5 tons
40 $575 5.5 tons
6 $395 N/A
There is no per -ton charge for the six cubic yard box. These six cubic yard boxes are picked up by
another vehicle which picks up several of these size bins before being weighed. This means the
customer can put out as many tons as s /he can fit into the six cubic yard box. The price is set so
that there are enough revenues to pay for the tipping fee on the expected tonnages
CSD19:A: \solwwst \dobch&n.swm